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If This Sector Runs Out of Gas, Will "Hybrids" Work?

"If your access to capital dries up, your business model falls apart. We don't have that problem." -- Tony James of Blackstone Group

In a recent Bloomberg article, it was reported that cash buyers for single-family homes represented nearly 50% of the transactions this past September. Let's take a closer look at some of the companies that have raised cash to help fuel this buying frenzy.

Plenty of gas in the tankBlackstone Group (NYSE: BX) recently revealed some insights into its privately held Invitation Homes, the largest single-family for-rent landlord in the United States. It didn't take long for Blackstone to grow its portfolio from 30,000 to 40,000 homes -- as it's still buying more than $100 million worth of homes per week. CEO Steve Schwartzman made a point to clarify that the $7 billion investment was not all equity. International banking giant Deutsche Bank has provided Blackstone $3.6 billion in credit lines to purchase homes.

Blackstone President Tony James shared that "this is a business with economies of scale" and added that "of our home... 95% are rented in 60 days -- we almost can't keep them on the shelf long enough."

Blackstone's groundbreaking bond offeringIn a world leery of real estate-backed financial instruments, Blackstone's Invitation Homes is bringing $480 million in single-family rental-backed bonds to the market. No easy feat in a marketplace slow to forget the havoc caused by mortgage-backed securities back in 2008.

Even simple questions have to be addressed: Are these securities residential mortgage-backed bonds or commercial? They are, in fact, a new hybrid. This is not easy ground to plow. However, it appears Blackstone has the horsepower to get it done. In fact, some of this offering might be rated Triple-A.

This tank appears to be at least half fullThe next largest landlord in the single-family space is publicly traded REIT American Homes 4 Rent (NYSE: AMH) , owning about 20,000 homes as of July 31. It was impressive how quickly American Homes reported leasing its homes available for rent last quarter, with 97% of homes rent-ready for 90 days being leased.

American Homes announced an amendment to its credit facility increasing its borrowing capacity from $500 million to $800 million. The maturity was extended to Sept. 30, 2018.

American Homes is creative as wellAmerican Homes created a hybrid of its own design in October, offering more than $100 million of a class of preferred stock that allows investors to participate in 50% housing price appreciation of its portfolio in addition to a 5% dividend -- up to a total return of 9% annually. It is a complicated security, and it will be interesting to see how investors perceive it.

How much fuel remains for these smaller REITs?

Silver Bay (NYSE: SBY) , the first single-family REIT to go public, currently has a market cap of $613 million and consists of 5,600 homes. As of June 30, Silver Bay reported 87% occupancy of homes owned for six months or longer, with only 65% of the portfolio being leased overall.

Silver Bay went on the road three times to present at investor conferences, highlighting results. In its presentations, Silver Bay estimated net asset value, or NAV, to be $18.95 per share and calculated book value to be $17.30 per share. The current $15.76 stock price seems to indicate a lack of confidence by investors.

Silver Bay announced a $200 million revolving credit facility back on May 13. Since then, there hasn't been any other announcement or filing regarding any additional capital.

In a related stor...American Residential Properties (NYSE: ARPI) is the smallest of the bunch, and its overall portfolio was 78% leased as of June 30.

American Residential went on the road and presented at two of the same investor conferences. The stock is currently trading at $17.30 per share, significantly below the $21-per-share IPO price.

American Residential has been active recently, expanding its senior revolving credit facility from $150 million to $290 million. It has an accordion feature allowing up to $500 million subject to obtaining additional commitments from lenders.

Investor takeawayBloomberg recently reported that Wells Fargo is working on a securitized offering for American Homes 4 Rent, expected in the first half of 2014. It also reported that privately held Colony Homes, owner of 15,000 properties, is looking closely at that option as well.

It's especially critical for investors in the two smaller REITs to understand how management intends to access the capital markets to fund operations moving forward. During the next week, each of these publicly traded REITs will report earnings and host conference calls. I'll be listening closely. Will you?

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